Do disasters have a silver lining?

Economic Myth Busters

Natural and other disasters are a gut-punch to
communities. But it's argued that economic uplift
often rises from the wreckage of such events.
Reconstruction dollars pour in from the outside
to rebuild. These dollars flow to workers, and to
machines and materials, much of which is
purchased locally. Economic activity is visible
and financially tangible.

A recent example is the devastation caused by the
August 2007 collapse of the Interstate 35W bridge
in Minneapolis. Immediately following the
collapse of the bridge, the federal government
provided $179 million in emergency aid to
Minnesota; four months later, another $195
million was allotted for rebuilding purposes, in
addition to existing state expenditures. With
funds of this magnitude pouring into the region,
isn't this disaster effectively a boon to the
regional economy? Or is this a myth?

Nineteenth century economist Frederick Bastiat
demonstrated that this is a myth through his
parable of the broken window and related the
economic concept of unintended consequences. The
story goes like this: A boy smashes a store
window. When the window is replaced, it benefits
the window maker. In turn, the window maker uses
his increased income to buy bread from the baker,
and so on. So the boy's vandalism triggers a
cascade of economic transactions.

But Bastiat reveals the economic fallacy of this
event because it considers only the benefits for
one group of people at one point in time. To
understand the full consequences, one must look
at the effect on all groups of people at all
times and consider the conjectured
alternative—what would have happened had the
window not been broken? Perhaps the store owner
wanted to buy a suit with the money he paid to
have the window fixed. Then the tailor loses a
sale, and so does the manufacturer of the fabric
used to make the suit, and so on. One must also
consider the value of spending derived by the
shopkeeper. Clearly, he would have preferred to
spend the money on a suit rather than to repair a
window that someone else ruined. Taking into
account all the costs and benefits, one finds
that the destruction of wealth is a net cost to
society.

The same logic can be applied to the I-35W bridge
catastrophe. Without even factoring for the
economic loss of the 13 people who died in the
accident, about 140,000 daily commuters who
previously used the bridge have to find more
time-consuming travel routes. The state of
Minnesota estimates that the cost of not having
the bridge is $400,000 per day. In addition, the
millions of dollars of federal and state funds
used to rebuild the bridge cannot be used for
other purposes. Most important, the families of
the people who died or were injured have to deal
with emotional and economic pain and suffering.

Minnesota does benefit from federal relief money.
But this is not costless; taxpayers in all states
are worse off because they funded the relief.
Neither does Minnesota capture all of the
economic spillover; a portion of the money spent
on the new bridge leaves Minnesota when
materials, equipment and labor are purchased from
out-of-state sources.

Had the I-35W bridge not collapsed, the region
would still have a bridge, fewer families would
be disrupted and public spending for a
replacement bridge could have been invested in
other necessary public goods. Given the hidden as
well as visible costs, the economic benefits from
the I-35W bridge collapse are far outweighed by
the costs.